Thursday, 12 June 2008

Why I still like Sanderson

I’ve been following Chris Winn and Sanderson for what seems like centuries. But I’ll start the story in 1999 with the Alchemy-backed MBO which valued Sanderson at c£114m. Sanderson, under Alchemy, begat three main operating units which, in turn, were floated or sold:

- Civica – public sector software and IT services – IPO and then, last year, became yet another ‘public-to-private’ backed by 3i

- Talgentra – billing and revenue collection system solutions primarily to utilities, public sector, finance and comms – was bought by Experian

- Sanderson – ERP systems – was the subject of an AIM IPO in Dec 04.

Let me freely admit that I’ve been involved to some extent in all of these companies. Indeed, I was (still am) an EIS investor in the ‘new’ Sanderson. That investment looked pretty good when they IPOed at 50p in Dec 04 and even better when they rose to a high of c74p soon after. Didn’t look so good when the share price slumped to 32p earlier this year.

However, today’s interim results have put a rocket under the shares which are up 7% to 40p in the first hour of trading today. Revenues for the six months to 31st Mar 08 are up 60% to £13m – mainly helped by the acquisition in Q3 last year of Retail Business Systems and of Elucid earlier in 2007. The problem is that I can’t see from the release, or the presentation, what the underlying organic growth is. My suspicion is that they were flat in both retail and manufacturing.

PBT was up 48% at £965K. EPS was up an impressive 46%.

Why do I still have a soft spot for Sanderson? Indeed, why did I keep the shares when I liquidated most of my equity portfolio in Q4 2007 (smart move as it turned out!)?

1 – The ‘Boring’ bit is that Sanderson ‘Stick to the knitting’. They know their verticals of Retail (c550 customers like Harrods and French Connection) and Manufacturing (c180 customers) inside out – as well they should after all this time.

2 – The ‘Exciting’ bit is that Online sales are now a specialty of the group. Given that online sales by ‘bricks-and-mortar’ retailers is still a major growth area, Sanderson are well positioned.

3 – They make c50% of their revenues from contracted, recurring activities like maintenance, support and recurring software. This covers c70% of the cost line.

4 – They pay a pretty impressive dividend; c7% at a 40p price. And that’s tax free to those like me who invested under the EIS scheme.

5 – Chris Winn, Sanderson’s Chairman is a good, old friend and fellow Archers addict.

Exactly what the future holds for Sanderson is less clear. Their problem is the old one of ‘scale’. Do they become a ‘consolidator’ – with all the attendant problems which this creates? Something I seem to have written more warnings about than any other subject. Or do they get acquired? My money – literally! – is on the latter. The only issue is When?

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